Music innovators pitch ideas in S.F.

DIGITAL MUSIC

Updated 8:22 pm, Tuesday, February 19, 2013

Until recently the music business had been a top-heavy industry, with artists and records controlled by a small handful of large labels. But the Internet, digital marketplaces and low-cost recording equipment have empowered musicians of all levels to take their careers into their own hands.

The Internet also has allowed listeners myriad avenues for discovering new genres and artists - previously beholden to radio stations for publicity - and presented new possibilities for distributing and monetizing content. Now artists can stream their own concerts to anyone who wants to watch or appeal to crowdfunding sites to finance their next tour.

Naturally, a churning technology market such as this attracts investment money. But finding the right business models has proved tricky.

That was the backdrop as the 13th annual SF MusicTech Summit got under way Tuesday at the Kabuki Hotel, with investors meeting with and taking pitches from entrepreneurs and musicians about how best to make money amid the industry's constant change.

Take, for instance, startups focused on disseminating existing music. They have an uphill battle if they need to sign contracts with big music labels to license the tunes. Larry Marcus, managing director at Walden Venture Capital and one of Billboard's 100 most powerful people in the music industry, says that these days, any startup music venture that predicates its business model on licensing fees is in trouble before it starts.

No clarity on licensing

"That is fundamentally not venture fundable," he said. Much of that is because the future of music licensing is so unclear. Google, Amazon and Apple sell music as a loss leader, he says, to keep their digital marketplaces relevant. "I don't think there's any clarity from the big labels on how (licensing) is going to work in the future."

Even online music services with large user bases have trouble getting over the same hurdle. Pandora boasted healthy growth in subscribers and generated $120 million in revenue in the third quarter of 2012 but barely turned a profit. The Wall Street Journal reported that Spotify earned $236 million in revenue in 2011, but at a loss of $56.6 million. Heavy licensing fees from the major record labels are attributed as reasons both are having trouble getting out of the red.

This has caused many startups to build their own recording ecosystems and marketplaces for music. Soundcloud, a Berlin startup with offices in San Francisco, has risen to a company of more than 170 people as an alternative marketplace to share music and discover new artists. Artists can upload their own songs, and then Soundcloud sells additional tools like statistics on people listening to songs.

Soundcloud has managed to create an entire music ecosystem. But investors worry that many music-focused software architects don't focus enough on the viability of their nifty music software ideas as a business. Often these ideas are really just part of bigger products, notes Carter Laren, CEO of MOX, an interactive online TV channel, joking that many ideas he hears are better suited as a feature on Twitter than as a stand-alone business.

"A lot of founders get caught up in solving problems, but don't look outside themselves," he says.

Key question to ask

While an entrepreneur's idea may prove useful, a company's founders need to take a hard look at the idea and decide: Is there really a need for the solution, or could a big network like Apple's iTunes store or Google Play - which have big licensing deals to sell music - easily replicate it and instantly squash the business?

Walden notes that even if a product attracts "super users," entrepreneurs can't lose sight of the need to reach more casual listeners. "Super fans of your product should be a proxy for the broader market," he says. "Not everything is about mind-melting technologies."

Quick return needed

But that broader market also needs to provide a fairly quick return. Technology venture capitalists are sometimes criticized for focusing on getting their investment back within five years - often much sooner. Entrepreneurs, by contrast, often envision the music market 10 years down the line, after prices of hardware and access to the Internet have normalized. Investment houses are rarely willing to take a flier on such a long bet.

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